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Question 2 Suppose that the current yield for a 1 - year bond is 2 percent and it is expected that subsequent 1 - year
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Suppose that the current yield for a year bond is percent and it is expected that subsequent
year rates will rise to percent, percent and percent, respectively. Assume that the pure
expectations theory of the term structure of interest rates is valid.
i Briefly explain the pure expectations theory of the term structure of interest rates
ii Calculate the current yield on a year longterm government bond.
iiiCalculate the current yield on a year longterm government bond
ivCalculate the current yield on a year longterm government bond
v Use the results you obtained in parts iiiii and iv to draw the yield curve and
comment on its shape?
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